Short Seller Found Culpable of Market Misconduct in Hong Kong

On Friday, 26 August 2016, the Market Misconduct Tribunal ("Tribunal") found Andrew Left guilty of publishing a ‘false and misleading' report regarding China Evergrande Group ("Evergrande"). This is the first time that the Hong Kong regulator has taken action against unregulated published commentary and the first ruling against a short seller report.

The Securities and Futures Commission ("SFC") had brought the action against Left, who heads the Los Angeles-based Citron Research ("Citron"), for a report published by the group in 2012. In the report Citron claimed that Evergrande was 'insolvent’ and had used ‘fraudulent accounting'.

Shares in Evergrande dropped by almost 20 percent following the release of the Citron report before closing 11 percent down on the day.

During the investigation the SFC found that Left had begun short selling Evergrande shares two weeks before releasing the report on 21 June 2012. He began repurchasing on the day the report was published, netting a profit of approximately HK$1.7 million.

Justice Michael Hartmann, who heads the tribunal, found that "…when he published the Citron Report, Mr Left consciously disregarded the real risk that the report was false and/or misleading as to material facts. He was reckless in his conduct". The judgment went on to add that "…the information in the Citron report was false or misleading as to a material fact, or was false or misleading through the omission of a material fact: the company (Evergrande) was not insolvent and nor had it consistently presented fraudulent information to the investing public".

The tribunal found the allegations of "insolvency" and "fraudulent accounting" at Evergrande were unfounded and went on to note that Left should have checked with both an expert and the company before publishing the commentary. The judgement stated that "… Mr Left failed to exercise that level of care … that is realistically required of a reasonably prudent person who has chosen to carry out the function of a market commentator and/or analyst …".

In early 2015, Mark Steward, who at that time was the SFC executive director of enforcement, underscored the regulator's intention to pursue misleading research reports that targeted Hong Kong-listed companies. Mr Steward commented that investors should be protected from "… shoddy research [that] affects stability in our markets".

The tribunal has yet to decide what penalty will be imposed upon Left. The maximum is a five year ban on trading Hong Kong stocks and returning any profits made from the Evergrande trades.


Head of Financial Services Disputes and Investigations, Asia, Eversheds